Thanks for the respond.
I will let a lawyer take care fo the legal stuff.
After giving it some thought I have come up with a formula for profit sharing:
Let’s say my partner (the contractor) and I buy a house for $100,000 including cost of fixing the property (e.g., $90,000 is the purchase price and $10,000 in material to fix it up to rentable condition). I will contribute the whole $100,000 in cash and we will come up with a mutually agreeable amount for his labor (e.g. $5,000). So in this case I have made a $100,000 investment and he $5,000 (not cash but sweat equity).
Since we are looking to hold this for a long term (at least 5 years) until the market turns to sell it we are keeping it as a rental during that period. Let’s say we will get $1,000 per month in rent and the average monthly fixed expenses are as follows:
Property Tax: $100
Utilities (water/sewer/trash): $150
Maintenance/Repairs: $50 (remember the house will be completely rehabbed)
Vacancy allowance (5%): $50
So we should net $500 per month (the are no loan payments to make so I think this positive cash flow is realistic).
I think it is fair to divide the $500 this way: For my initial $100,000 investment I want a 3% “guarantee” return so it works out to be $250 per month. If his initial $5,000 he should get 3% also = $12.50. After we subtract the “guaranteed” return portions for both parties we will divide the remainder 50/50.
Now when we sell the property we will calculate the profit sharing in the same manner but probably at a different “guaranteed” return rate.
Say we sell the house a 5 years later and after all the closing costs we will net $165,000 so there is a $60,000 net profit after I get back my initial investment of $100,000 and his of $5,000. I would propose a “guaranteed” return of 10% for the initial investment so my “guaranteed” portion using simple interest would be $50,000 ($10,000 x 5 years) and his would be $2,500 ($500 x 5 years). We will subtract the guaranteed return portion of $52,500 from $60,000 and divide the rest 50/50.
I think my partner should be happy with this arrangement because he would get more than $10,000 in 5 years (this does not even counting the monthly cash flow portion) from basically nothing but his initial sweat equity.
Of course we have to divide the management responsibilities during our holding period but that detail can be worked out.